Zestimates. What is they? And how accurate are they? Svenja Gudell, Director of Economic Research, Zillow, explains Zestimates, how they are made, when they should be used, and the benefits to home buyers, with hosts and Realtors Tracy and Kathy Nelson.

“The Zestimate® home valuation is Zillow’s estimated market value, computed using a proprietary formula. It is not an appraisal. It is a starting point in determining a home’s value. The Zestimate is calculated from public and user submitted data; your real estate agent or appraiser physically inspects the home and takes special features, location, and market conditions into account. We encourage buyers, sellers, and homeowners to supplement Zillow’s information by doing other research such as:

Getting a comparative market analysis (CMA) from a real estate agent

Getting an appraisal from a professional appraiser

Visiting the house (whenever possible)”

Svenja goes well beyond this, discussing the underlying process, the accuracy, and how buyers should use Zestimates.

Complete transcription (May 15, 2015):

eye4homes :: Hello. Welcome to the show. I’m Kathy. And I’m Tracy. And we are a husband and wife real estate broker team with John L. Scott in Redmond Washington. And you are watching Buying Your Dream Home Today. A weekly webcast that happens every Friday at noon. These shows are focused on giving you the information you need to go out with confidence and buy your dream home. And today’s topic is Zestimates. So if you’re buying a home right now you’ve got your smartphone every night, you’re looking at all sorts of things, and especially Zillow. And when you’re looking at Zillow you’re probably really interested in what house prices are, what the house values are, and that’s where Zillow has this thing called Zestimate. And we are very honored to have with us today Svenja Gudell, the Director of Economic Research with Zillow. So hello Svenja. Hello and welcome to the show.

Svenja :: Hi guys. Thanks so much for having me. It’s a pleasure to be here.

eye4homes :: It’s great to have you here. Can you tell us a little bit about yourself?

Svenja :: Sure. As you guys mentioned I’m the Senior Director of Economic Research at Zillow, which is a fancy way a saying that I run our economic research team. And we have roughly 10 folks here in Seattle that work exclusively on Economic Research. And that means really answering any sort of questions that might be interesting for buyers and sellers, and really anyone out there on the street having to do with housing. So things like: Should I buy or should I rent? Should I get a mortgage? What type of mortgage should I get? GSE reform – what’s happening with that? Affordability – is it, you know, is it a problem across the country or not? What are prices doing? So really any sorts of questions having to do with housing we try to address. My team works on kind of crunching the numbers and making it accessible to the consumer out there.

eye4homes :: Wow! Sounds like you have a big job.

Svenja :: It’s a fun job. I can tell you that much and…

eye4homes :: Yeah it looks like it. That’s great. Before at Zillow it says you were PhD, you have a PhD in finance from University of Rochester.

Svenja :: I do, yep.

eye4homes :: And you worked at the Federal Reserve Bank of New York. The federal reserve must have been an awesome start there.

Svenja :: It was. You know it was my first job out of college and it was fantastic. I really enjoyed working there. There were a ton of smart people working there and we did a whole bunch of research. It was just super incredibly interesting and I met a lot of great people. And it was the type of job you really want first time out of college because you didn’t get stuck having to make photocopies. You actually worked on really interesting problems.

eye4homes :: Wow. That does sound nice. And Zillow was able to catch you?

Svenja :: They were, yes. I was very interested in moving to Seattle. My husband works here for Microsoft, and…

eye4homes :: You know that is the perfect scenario too, Zillow and Microsoft, Seattle…

Svenja :: It’s so true. And I actually live over in Redmond, so I’m right in your backyard there.

eye4homes :: Did you use Zillow to find your house?

Svenja :: Yes, actually I did use Zillow, believe it or not.

eye4homes :: Good answer.

Svenja :: And you know, we bought a house here and we truly enjoy living in the Northwest. It’s been wonderful.

eye4homes :: Well good. We’ve been here for 20 years. It’s a beautiful place.

Svenja :: Oh yeah, sure.

eye4homes :: So let’s get into Zestimates. It’s one of the most interesting things on Zillow probably, which people look at a lot, and so what are they what makes a Zestimate work?

Svenja :: So just to define what the Zestimate is, it’s really an estimate of your home’s value. So if, you know, if someone were to give you a very educated guess of what your home is currently worth that would be a Zestimate. And it’s a starting point because it is a statistical language of point estimates, which means it comes with a confidence interval. It’s, you know, it’s not the true estimate, it’s not the same as an appraisal or anything like that, but it’s what a machine with a whole bunch of data, through millions of models, thought your home was worth. And it really gives you great starting point today to get a feel for what the house might actually sell for.

eye4homes :: It does, and that’s a good point, is that it’s a good starting point. That’s what our clients have done is, they’ve done the research before they come to us and it’s usually going to Zillow, and some other places too, and I have Zillow on the… you know, there’s a Zestimate kind of look of what you would be doing on the screen… so if you would put that up… to where you find your area that you’re interested in, and Zillow hones in on it and then you go from there. Yeah. You know, in the book I read recently, Zillow Talk…

Svenja :: Yes, that’s right.

eye4homes :: …and it was a good book, and I really enjoyed it…

Svenja :: Excellent.

eye4homes :: …it talked about those millions of calculations, millions of things that happen, and the algorithms that go along with it. I guess there’s some pretty sophisticated algorithms in it.

Svenja :: Yeah, and I can give you a little more background if you’re interested in seeing the sausage-making if you will, about what goes into the Zestimate.

eye4homes :: Yeah, that would be great.

Svenja :: Yeah, so it’s really, what we do is, we take the US as a whole and we split it up into thousands of what we call micro regions. And all these regions are a collection of homes that are fairly similar to one another. And these can be fairly small regions, and sometimes, you know, slightly larger regions. They’re not zip codes or anything like that. They’re whatever we make them out to be, but they’ll always have that collection of homes in an area that are similar to one another. And in every one of those regions across the US we run thousands of models. And these models will usually be a matchup between a model and algorithm. So you know, you can think of like a machine learning type of models that we do – “k nearest neighbor”, or a “praise emulation” type of model, or straight up linear regressions that we do. So any model – or “random forests” that we also frequently use. So within every little sort of micro region that we have we run thousands of models, and then we check to make sure how accurate these models are. And we do that by looking at the sale price and the actual estimate, the Zestimate, that was created by a model right before the sale of a house happens. So blind to the actual sales data. And then we compare, you know, if the Zestimate was really close the sales data the model did pretty well. And if the Zestimate that was created by that model was really far off from that sales data then it didn’t do so well. And then a metamodel, which is a model, a parent model if you will, sits on top of all these other children models and judges how well all these children did, and says you know I’m gonna pick you and you and you because you perform best. And blends them all together and creates the final Zestimate.

eye4homes :: Holy mackeral. You sound like the mommy of it all.

Svenja :: Well if you think about it in terms of, I always like to use the example of a winemaker you know, if you’re trying to create a really nice red wine blend you take a little Merlot, a little Pino, a little Cab and blend it all together. That’s really what this metamodel does too. Blend it all together and come up with the best possible Zestimate we can come up with.

eye4homes :: In the book it says that that blending is over 1.2 million statistical models a night.

Svenja :: That’s right. That’s exactly what happens.

eye4homes :: It’s just a little bit you know. That’s pretty awesome. I like how you use the metaphor with the wine too. You like that wine stuff. So you kind of touched on it there, about how the estimate kind of molds itself to get as accurate as it can be. That’s one of, probably, the things about the Zestimate that, I don’t know, is controversial sometimes. At least for real estate agents. And what is it about the accuracy? Can buyers really depend on the value that they see when they look at a Zestimate?

Svenja :: You know I always think that a, again, it’s a starting point. So it’s a good estimate of what the house could sell for, but one of the things I always recommend is, given that it is a point estimate and it’s not you know the true value, I recommend looking at the value range. If you go to a home’s page and you look at the Zestimate there’s also a value range that’s listed. So say the Zestimates for a house on Education Hill is $750,000 but the range is anywhere from 680 to 850…

eye4homes :: Yeah we’re actually looking at one that is 750. This was kind of interesting because it’s just gone on the market. I think a few days ago. It’s on sale. What it’s up for sale for is 750,000.

Svenja :: Okay.

eye4homes :: The Zestimate is 656 and the the range is… let’s see if I can see it here… 610 to 702. So and actually there may be some other houses in the area that might be closer to that range. So it’s just very interesting that the sale price is 750.

Svenja :: Yes. So you can see the sale price as well out of that range. That’s a fairly tight range around a Zestimate, so that can gives you a sense of, you know, is that Zestimate really far off? Because if you were to look at that range and it was like 350,000 to, you know, 1.2 million dollars it be like okay. They don’t really know what the Zestimate is here, right, because the the range is huge and so you really you want to believe more in the Zestimates that have a very tight range than the ones that have a very large range. And that’s all driven by data availability, how much data do we have to come up with a great Zestimate. And we always try to come up with a Zestimate because we think it adds value to a transaction. But you know sometimes it’s not as good as other times.

eye4homes :: Right. We’re looking at one here that is a range of 418 to 462, and this one actually sold just recently for 453, and the Zestimate is 439. So that all seems fairly consistent. Do you think?

Svenja :: Yep, no, and that sounds good. That’s pretty tight I’d say. And of course keep in mind these are created by machine, so no one has ever viewed this house and walked through. Which is where you guys come in.

eye4homes :: Well, and that’s what i was gonna bring up too, is that it helps, you know, when they start looking because most to the people that I know, our buyers, they’ve got their smartphone and they’re looking at Zillow, and all the other apps, and they’re getting a sense of where they want to go, what houses they want to see, and what you have here on Zillow, the Zestimates, help them figure out the range of where they want to go.

Svenja :: Yeah that’s exactly right, Kathy. I think you know when you’re starting out and you’re doing your home search, you know, like I have a budget of roughly $500,000, you want to be able to look at homes that you can actually afford. So having that Zestimate there really gives you a nice flavor for the neighborhood. Even if there’s currently not home up for sale in that area. It tells you, ok this might be an area I could afford to live in. And it’s really a nice educational tool in that sense. And then once you got started to go further down the road we always recommend contacting a local real estate agent who can tell you about that area, and who can help you identify that house, walk you through that house, and then also give you a little bit more information about what the house might sell for and what kind of competition you’re going to face as a buyer in that marketplace.

eye4homes :: Yeah it all starts with the online search, and then it goes on, you know, to one of us.

Svenja :: That’s very true, and I think we, you know, we’ve come so far in a relatively short amount of time in terms of how a home search is now conducted. We used to, I remember my parents buy homes and there was no internet that you could turn to actually browse homes. And so you know that there was no Zillow back then to do this. So they were very dependent on kind of seeing what they were shown. And now you can do a lot of that pre-shopping up front. So it’s kind of nice to have that input into the process.

eye4homes :: It is. It’s just a whole different world. Your life is totally, the lifestyle of doing this too, is totally different than ten years ago. When you can look at everything after the kids go to bed and email or text or whatever your agent, and the next day you can go out and look at all those homes.

Svenja :: Yeah, and I also wanted to mention that we do actually publish our accuracy. If you go to Zillow.com and you scroll down to the Zestimates at the bottom of the page, then there is a block that tells you accuracy. And on that page it will bring you to a table that shows you our median absolute error for the nation, which currently is right at 8%. And then you can also do it for different metros or counties. We do better in Seattle, or metro Seattle. We’re right around six to seven percent there, median absolute error. And the great thing is we give you rangers too. We tell you how Zestimates fall within plus or minus 5% of the sale price, or plus/minus 10 or 20 percent of the sale price, to give you real sense of, you know, are the bulk of these Zestimates fairly accurate or are they, do they have more statistical error in them.

eye4homes :: I like how you put it all on that, on the Zestimates page too. You tell it like it is.

Svenja :: We do, I mean, we really try to be very transparent. We truly believe that the consumer can be empowered by having more data to work with, and some part in the data is surely knowing the accuracy of that Zestimate as well.

eye4homes :: Absolutely. Also like to know, since this is a show primarily towards buyers, I’m just wondering now, you’ve talked about searching for homes using Zestimates, and getting the price range that you’re looking for, and that’s great, is there any way that you suggest to use Zestimates when making an offer for a house, or maybe during the closing process?

Svenja :: You know I think, again, it’s great at the beginning of the process. I think once you actually have seen the house yourself you’ve got a Realtor’s opinion on the house, judged the local competitive landscape, it’s probably not quite as useful anymore as it was in that initial step because you have gathered so much more information along the way. Having said that though, I know people definitely use it as a signal to see, you know, are people listing really low and trying to get multiple offers on this to raise it up. Because the Zestimate is much higher a lot of times, indicating that they really listed low. Or are they listing in touch too high? But again I really think that getting a real estate professional’s opinion on that is extremely helpful.

eye4homes :: Well we can’t agree more on that. Thank you. Well we’re almost at a time here, and I know you’re very busy over there at Zillow, so, but we’re wondering if you could give us just a little bit of maybe what we can expect in the future. Any new Zestimate and Zillow features we can look forward to.

Svenja :: Sure. I mean we have, you know, multiple teams actually that constantly work on improving our website. And we have a whole team dedicated to the Zestimate, trying to make that better on a daily basis, and so we come out with new iterations all the time that improve how we measure home values. And a lot of times its reflected in our error. So over time our error has gone down tremendously because we’ve gotten much better at trying to value homes. And we put new features on our site all the time too. Not too long ago we put school information on our web pages and that was very useful for buyers. And we now have a forecast for what your house might be worth a year from now, so that kind of gives you a hint, you know, of is my home’s value going up, or is it staying relatively flat. Or in some areas is it even losing value. So, you know, we really come up with new products all the time. So stay tuned and check often I guess I would tell you.

eye4homes :: Well that’s excellent. Well thank you so much for being a guest on our show today. Yeah it was wonderful to have you here. Thank you very much for giving us your time.

Svenja :: Of course. It’s my pleasure. Thank you.

eye4homes :: Alrighty. Bye bye.

Svenja :: Bye bye.

eye4homes :: When we can help our clients out by giving them the source, it’s really nice… Yes, that was definitely going to the source. Yes that was the source. And so everybody, thank you so much for being a part of today’s show. And look for more on eye4homes.tv. Eye4Homes TV and have a great weekend. Bye bye.